14 Dec 2021
2021: reflecting on a year of change
2021 has been a year of change: from constitutional change to climate change.
The industry has been adapting to the post-Brexit regulatory regime as well as raising expectations in terms of environmental, social and governance (ESG) priorities
At the start of the year, the FCA’s new Handbook with revised wording was implemented to reflect a new regulatory regime, and structures such as the Temporary Transitional Powers and Temporary Permissions Regime helped to ensure a smooth transition for the industry.
This approach minimised disruption but left open broader questions of what the future UK/EU relationship would look like, which will continue to drive regulatory activity as we look ahead to 2022.
Hence the government’s call for input, in January, on the future of the UK funds regime. Respondents were asked for their views on how to boost the competitiveness, attractiveness and efficiency of the UK as a funds domicile, whilst upholding consumer protection and market integrity. It is notable that, though the call for input closed in April, the outcome of the review is still to be confirmed.
NatWest Trustee and Depositary Services (NWTDS) responded to this call for input, noting that there was more that the UK could be doing to market itself as the leading funds domicile, not least in terms of its strong global reputation for governance, of which the independent depositary model is a key part. We also argued in favour of enhancing the ‘shop window’ of UK funds, introducing changes to the branding of the NURS regime for example, and seizing the initiative on ESG to enable the UK to become the leading jurisdiction for responsible investment. Again, independent oversight will be critical to this and we see the depositary playing an increasingly important role in this respect.
Part of the competitiveness drive led to the ‘at pace’ development of the Long Term Asset Fund, which NWTDS supports. The Chancellor announced this new fund type in November 2020, with a desire for the first funds to be issued by the end of 2021, which has ensured that the LTAF received an accelerated focus throughout the year – the consultation closed in June and the policy statement came out on 25 October, just three weeks before the new rules were implemented on 15 November – a rapid deployment indicating a more agile approach to regulatory implementation when it is in pursuit of building out a more globally competitive funds industry.
The FCA also addressed the challenges of purpose and strategy – its mid-year Business Plan came out in July – a few months later than usual, but worth waiting for as it set out a clear steer for the year ahead: more assertive, more innovative and more adaptive, with an enhanced focus on the priorities of consumer protection and duty of care, diversity, and climate change. In our role as depositary we have seen the FCA taking a more probing approach to fund authorisations this year, as well as the issuance of detailed requests for information, indicating a growing regulatory desire for more ‘deep dives’ to understand the composition of funds at a more granular level and of the firms which issue them. Again, this is core to ensuring investor protection and we believe that independent oversight and governance will play an increasingly vital role in this agenda.
Related to this, fund governance has been a particular area of focus. The FCA’s keenly-awaited review into the Host AFM market was published in June, with robust feedback for the host sector in terms of, among other things, conflicts of interest, governance, and skills. The review should be seen as part of a process rather than an event: the FCA has said that it will follow up in 12 to 18 months after the publication of the original report, to assess progress. We believe that the industry as a whole should review the FCA’s feedback on a ‘best practice’ basis: there is read-across which the wider funds market should be aware of and some firms, even outwith the Host sector, may glean valuable insight into how they could enhance their own processes and governance.
Assessment of value (AoV) reporting has also been in the spotlight. A year after the introduction of AoV reporting, the FCA issued its initial feedback on the exercise and again the feedback was robust: too much focus on the fund-level value rather than at underlying unit level, issues in terms of rigour in assumptions, and concerns about the adequacy of challenge provided by independent non-executive directors through governance structures. This feedback should be welcomed by the industry in the interests of its clients. The FCA will expect to see its feedback reflected in the next round of reporting and so a review of the feedback, and mapping to AoV reporting, will be a valuable exercise.
Read our full analysis of the Host AFM review, and our overview of the Assessment of Value review.
Depositaries have been addressing their own processes and procedures, working with the FCA to help shore up their approaches to discharging their duties under COLL 6.5.
As a result of these initiatives, 2021 has been a year in which the architecture of the industry has been strengthened for the future
The broader theme of resilience has of course remained prominent, whether that be in terms of firms’ ongoing management of the challenges posed by Covid-19, or the focus on operational resilience. For the former, firms have been taking cautious steps towards returning to offices – and the FCA is paying attention to new ways of working, issuing its guidance on hybrid and remote working in October.
Operational resilience is also gaining momentum, with the publication of the policy statement in July, and emphasis now on identifying important business services and setting impact tolerances for the March 2022 deadline.
The Investment Firms Prudential Regime has also been steadily building up throughout the year, with three consultations, three policy statements and finalised rules all being published, ahead of implementation in January 2022, making preparation for implementation an end-of-year priority for firms in scope.
As for LIBOR, regulators have been clear throughout 2021 that the industry is in the ‘home straight’, with the transition period set for the end of December, and no appetite for stumbles in the final stages.
The regulatory focus on cryptoassets has continued to grow... The FCA has been clear about the risks associated with retail investment in this space: a number of speeches have highlighted the potential pitfalls. Firms are watching closely, and considering the opportunities and risks, including in related areas such as tokenisation. The Treasury consulted on stabletokens earlier in the year, but we are yet to hear the outcomes from that process: this is one to watch next year.
The climate crisis
And finally, climate change. The Cop26 climate conference in Glasgow has focused minds on the role of financial services in tackling global warming; and the themes of Net Zero, responsible investment, and associated challenges such as transparency, assurance and credibility have continued to gain momentum throughout the year. We saw the publication of the FCA’s ESG regulatory principles in July, and its approach to sustainable fund authorisations. The first signatories to the new Stewardship Code have been published, with the focus on outcomes proving a major step up for applicants. Expectations are growing for firms to show, in a credible and transparent way, how on a firm and product level they are addressing the climate challenge.
Attention is increasingly turning to assurance and objectivity: the release of November’s discussion paper on the Sustainability Disclosure Requirements (SDR) and the publication of the government’s ‘Greening Finance’ report in October point towards a doubling-down of efforts for the UK to lead the way internationally on climate finance, with the funds industry playing a critical role. To achieve this it will be vital to avoid the risks of greenwashing, or of boilerplate reporting: ESG claims made in prospectuses and marketing materials need to be backed up by verifiable data.
There is no doubt that this has been an historic year in regulation, encompassing some of the biggest challenges of recent times: the UK has been establishing a new regulatory regime in the midst of a pandemic, with increasing public demand for more action on climate change. It has not been a ‘business as usual’ year.
There is much to reflect upon, but there is no indication that this pace will let up as we look forward to 2022.
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